Yahoo's Alibaba deal should ease shareholder suffering

ROBERT CYRAN

Globe and Mail Update

March 26, 2017May 22, 2012

Yahoo's $7.1-billion (U.S.) Alibaba deal has simplicity on its side. The Internet company has spent years trying to unravel its Asian assets while avoiding capital gains tax. This straightforward transaction allows the convoluted and gaffe-prone company to unlock value while giving Uncle Sam his due. It's a lesson other U.S. firms should heed.

Yahoo is getting cash for most of the 20-per-cent stake in the Chinese Internet firm that it's selling, and preferred stock in Alibaba for the rest. It will also receive a $550-million upfront payment for a licensing agreement. All in, this will result in a hefty tax bill of about $2.5-billion.

The remaining money will be used for a buyback. And there's more to come for shareholders. Yahoo will sell half of its remaining 20-per-cent stake if Alibaba floats before 2015 and can sell the rest subsequently. Since the Chinese firm wants Yahoo out, an IPO occuring before then seems pretty likely. Alibaba also gets to save a few hundred million in royalties to Yahoo if it floats sooner. Furthermore, the Internet firm can now turn its attention to unwinding its $6-billion stake in Yahoo Japan. Considering Yahoo's enterprise value is only about $17-billion, the prospect of all these giant buybacks should ease shareholders' long suffering.

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This deal is much simpler than the absurdly complex transactions that had previously been mulled. For example, Alibaba was considering buying assets, pooling them with its own assets and cash and injecting it all in a new subsidiary for Yahoo. But there were a slew of complicating factors. There is a history of distrust between executives of the two companies, the asset purchases would have added other parties to the deal and there was no assurance the tax authorities would go along. Yahoo's history of gaffes – such as not checking its recent chief executive's résumé – also didn't inspire much confidence it could pull off a complex transaction.

Yahoo seems to have learned that trying furiously to dodge the tax man has costs. Procter & Gamble came to the same realization recently when its attempt to unload Pringles to Diamond Foods crumbled embarrassingly under questions about the buyer's accounting. This is a valuable lesson. With tech firms holding billions of dollars in cash overseas, and their stocks at low valuations, perhaps it's time to rethink the idea of keeping these stashes overseas while waiting for Uncle Sam to give them a break.

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